Tax Consequences of Cheating

Jacob Stein Esq.
November 5, 2007 — 1,109 views  
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A bit over a month ago, Bill Belichick, the head coach of the New England Patriots, was fined $500,000 by the NFL. The cause of the fine? Videotaping defensive signals used by the coaches of the New York Jets. While Belichick wallows in the pride of setting a new NFL record (for a fine), he has gone on to receive a contract extension through 2013. His fine raises an interesting tax questions, is his fine tax deductible?

 

This interesting issue has caused sleepless nights for many NFL fans, and apparently for most of the contributors to the famous TaxProf Blog. The blog published an email discussion by several tax law professors from various law schools. After a heated discussion involving numerous emails, the law professors concluded that the fine was in fact deductible by Belichick.

 

The argument centered around whether the $500,000 fine paid by Belichick was for cheating, or for rule breaking. If the fine was for rule breaking, then the next question would be, is it an “ordinary and necessary” business expense within the meaning of Code Section 162(a).

 

Most of us would view the fine as a penalty imposed for cheating. After all, how else can one describe secret videotaping of the opposing team’s practice? Isn’t the purpose of such videotaping to gain an unfair advantage? It is therefore the classic definition of the word “cheating.”

 

The argument advanced by several tax professors is that coaches and players in professional sports cheat frequently. Remember steroids? They are certainly a form of cheating. If coaches and players cheat frequently and are fined when they are caught, that is an ordinary and necessary business expense, argue the professors. The opposing point of view would argue that in many countries kickbacks are an ordinary and necessary business expense, but our tax law still does not allow a deduction? How can one distinguish a fine for cheating from a kickback?

 

The brilliant tax professors reached the following conclusion. The $500,000 fine was not imposed on Belichick for cheating. It was imposed for breaking an NFL rule, and is therefore deductible. The analogy would be a fine imposed on an NFL team for violating the salary cap. That should be deductible as an ordinary and necessary expense of remaining a part of the NFL.

 

Leave it to the lawyers to figure out the fine points of football.

Jacob Stein Esq.

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Jacob Stein, Esq. is Managing Partner at Aliant, LLP. He specializes in structuring international business transactions, complex U.S. and international tax planning and asset protection planning. Mr. Stein received his law degree from the University of Southern California, and a Master of Laws in Taxation from Georgetown University. He has been accredited by the State Bar of California as a Certified Tax Law Specialist, is AV-rated (highest possible rating) by Martindale-Hubbell and has been named “A Super Lawyer” by the Los Angeles Magazine. Over the course of his career Mr. Stein has represented thousands of clients, including: officers and directors of Fortune 500 companies; Forbes 400 families; celebrities; Internet entrepreneurs; high-profile real estate developers, builders and investors; physicians; wealthy foreigners doing business in the United States; small business owners; attorneys, accountants and financial advisors; and many other individuals facing financial adversity or seeking privacy for their holdings. He is the author of numerous books, scholarly articles and technical manuals including his most recent article, Pre-Immigration Taxation, published in the January 2016 edition of EB-5 Investors Magazine Volume 3, Issue 3. His other works include his most recent book: A Lawyer’s Guide to Asset Protection Planning in California, Second Edition, published in April of 2016, which is the only legal treatise on asset protection specific to California; International Joint Ventures – A Concise Guide for Attorneys & Business Owners, published in 2014 and his Asset Protection Planning and Advanced Tax Planning Techniques manuals,which have been used by the California CPA Education Foundation for the past 10 years. Mr. Stein is a frequent lecturer to various attorneys, CPA and other professional groups, teaching over 100 seminars per year. His presentation topics include: A Foreigner’s Guide to Investing in U.S. Real Estate, Tax Planning for Cross-Border Joint Ventures, Creative Planning with Controlled Foreign Corporations, Advanced Asset Protection Planning, Choice of Entity Planning, Estate Tax Planning and various courses on trust law. He is an instructor with the California CPA Education Foundation, National Business Institute, Thomson Reuters, the Rossdale Group and Lorman Education Services where he teaches courses on advanced tax planning, structuring international business transactions, asset protection and trust law. He is an adjunct professor of taxation at the CSU, Northridge Graduate Tax Program.